Michigan’s Pension Underfunding Problem

Pension systems across Michigan are facing a crisis that threatens workers, retirees, businesses, taxpayers and residents who rely on public services. For decades, state legislators and governors, Republican and Democrat, have promised billions more in pensions than has been saved to pay for them. In 2015, the state put roughly $2 billion towards pension benefits of its largest pension system and unfunded liabilities still grew. This repeated underfunding has led to large liabilities that will require severe cuts to public services.

The Problem

The Michigan Public School Employee Retirement System is underfunded by $29.1 billion, meaning only 60 percent of the money needed to pay its costs has been set aside.

This school retirement system now gobbles up 36 percent of school payroll costs, often limiting teacher wage increases and requiring cuts to other school services. And things are just as bad in local governments.

Only a few of the largest municipalities in Michigan fully fund their pension system, with the average city funded at only 67 percent — more than $5.4 billion in total liabilities. This has contributed to the fiscal crises in Detroit, Flint and elsewhere.

School Pension Costs as Percentage of Payroll

The Solution

Shift new public employees to a 401(k)-style, defined contribution plan as was done for state employees in 1997.

Begin paying down the balances owed to current pension plans to ensure no future emergency bailouts are required.

Honor all pensions that have been promised to existing workers and retirees.

We need to protect our retirees and the promises we have made to current workers. In 1997, the state of Michigan began shifting new state employees from a defined benefit pension system to a defined contribution, 401(k)-type plan. This has saved billions and ensured flexibility and fairness to new workers establishing a plan that prevents the state from underfunding the system going forward.

We need to do the same for all public workers, beginning with new school employees. This will help prevent cuts to basic government services by schools and cities, protect the pensions of current workers and retirees, and save future taxpayers from having to pay for the bankrupt promises of previous generations.

Pension Funding of Michigan’s 100 Largest Cities

Our Research

Policy Brief

This study considers the supposed ‘transition costs’ that would be effected by a state switch from a defined-benefit to defined-contribution retirement system.

This paper reviews MPSERS and MSERS pension and retiree medical benefits and confirms many of the published concerns related to the level of benefits provided and the associated fiscal challenges facing Michigan taxpayers in both the short and long term.

In this Policy Brief, the author analyzes state pension data to determine whether state taxpayers have saved money as a result of the switch.

Viewpoint

The state’s unfunded liability in the Michigan Public School Employees Retirement System has more than doubled in the past five years, despite pension reform last year. Legislators must address this issue in order to preserve retirees’ pensions, constitutional demands and proper funding of the budget.

The retirement fund for public school employees is $25 billion in the red. Legislators should close the system and put all new hires into a defined-contribution system to protect taxpayers and school employees.

Detroit’s bankruptcy proceedings have garnered national attention, and a big factor in the city’s insolvency is its pension debt. But data shows that the 35 largest cities in Michigan have a combined pension underfunding problem of $2.1 billion.